OpenGardens and Metcalfe’s law

This section reflects our thinking for the next version of OpenGardens. It is an excerpt from the first chapter

Introduction

A few months ago, we were approached by a company that had created ‘an interesting mobile application’. They were eager to demonstrate it to us.

They hoped that we would be able to advise them on the best way to deploy the application to mobile operator portals. It was pitched as ‘unique’ and ‘viral’. We were intrigued enough to meet them.

Functionally and technically, the application worked perfectly. However, it was based on sending MMS (Multimedia messaging service) messages to any other phone in the country. They believed that since MMS had been around for some time now, it was a mature technology. In addition, a majority of new phones today are camera enabled. So, they believed that the future of MMS was secure. They even had a report from a top tier consulting company indicating that by year 20??, 90% of phones would have the required MMS capability. All this made them believe that they had a ‘mass market’ application.

They had ‘tested’ it on a set of phones. We noticed that the same phone model was used to test the application in sending and receiving the message. We also noticed that all the phones being tested were on connections from the same mobile operator(carrier).

A lot of money had been spent already in development, testing and a set of ‘advisors’.

Much to their dismay, we felt that this application could not be deployed in the near future. Sadly, this scenario is common with so many applications that we see today. So much so – that helping new companies to avoid similar errors is one of the chief motivations behind OpenGardens.

OpenGardens

Leaving aside technical issues(sending MMS messages to any phone) there are two fundamental problems

a) For a ‘viral’ application (think ‘hotmail’) you need favourable conditions for the network effect/metcalfe’s law to thrive and

b) The Mobile operator portal is often not the best channel to market. It would potentially be a lot more profitable to explore other channels to market.

These two problems crystallise the rationale behind OpenGardens.

Written for the applications developer, OpenGardens draws on our extensive experience of working with emerging mobile data applications(our online/offline communities span more than 3500 developers from more than 26 countries at last count).

We are believers in it’s true potential. And it does have tremendous potential – as yet untapped. But, there are many pitfalls. It’s easy to get seduced by the mobile data industry. After all, the Internet was a goldmine – so why not the Mobile Internet? – goes the train of thought. This superficial comparison ignores many things – the first being that the Internet has been around for more than twenty-five years and it’s really only in the last ten years that we have seen the entire ‘Internet economy’. Secondly – the success of many applications on the Internet(hotmail, paypal, ebay etc) have been powered by the ‘network effect’.

Sadly, at the moment, the mobile data industry is not conducive to the emergence of the network effect(in a majority of cases).

Take the case of MMS – it’s not very easy to send an MMS message across operators. The costs of doing so are unclear. The minimum data sizes supported are not very well publicised. In addition, it’s physically not easy to send the MMS message. So, whatever the pundits say .. it’s far from viral.

In light of the above(no network effect), there are two things you could do.

Either – you give up on the industry for now (in which case you are reading the wrong book ) or you reconsider that the industry has potential to be a trillion-dollar industry.

This brings us to the second facet of OpenGardens – It’s important to understand ‘channels to market’ to complement the current industry fragmentation.

In other words, our goals should be to firstly understand the various channels to market which could be used to deploy our application(so that some revenue starts to come in) and at the same time keep a lookout for sectors of the industry displaying the network effect.

In effect, the philosophy of OpenGardens encourages the emergence of the network effect in the mobile data industry. The word ‘OpenGardens’ is the philosophical opposite of the often prevalent ‘walled gardens’ mentality in the industry.

So, we have to understand two things – firstly the ‘network effect’ and secondly ‘channels to market’.

Let’s start with understanding the network effect.

Metcalfe’s law and the network effect

According to www.wikipedia.com

The network effect causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service. Metcalfe’s law states that the total value of a good or service that possesses a network effect is roughly proportional to the square of the number of customers already owning that good or using that service. One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good – for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities. This is also an example of a positive feedback loop.

What does Metcalfe’s law mean for us in the mobile data industry?

While we talk of ‘customer created content being king’ – we make sharing of that content very difficult on the mobile device. Yes, you may be using a camera phone – but it’s increasingly difficult to share your pictures via MMS for the reasons outlined before. Let’s go one step further, you are in a ‘walled garden’. Thus you can create your own content but you can’t share it with anyone outside that wall. Ho – hum!

The one instance where the network effect works in the mobile data industry is – SMS(Short messaging service). It’s cheap, it’s simple, ALL content is user created, it’s price is known in advance, almost all phones support it and in most cases(at least in Europe) – you can send and receive an SMS message from anyone on any network.

There are very few ‘barriers’ to SMS. SMS is an example of creation of a successful ecosystem using the OpenGardens mindset. The OpenGardens mindset calls for a breakdown of barriers to foster uptake i.e. creation of an ecosystem where it’s possible to deploy an application that has the potential to benefit from the network effects. This means removal of physical barriers(inability to send MMS messages to subscribers of other operators) and psychological barriers(not knowing the cost of a service in advance).

New mobile applications based on Metcalfe’s law

Ahh .. But isn’t the network effect/metcalfe’s law tarred with the dotcom fiasco?

While it’s true that the network effect was presumably behind many a ‘dot com’ business model – we now have the benefit of hindsight with the passage of a few years.

Network effects were often misunderstood with economies of scale(or worse still brand protection). Economies of scale arise from lowering costs of production as volumes increase. Brands, on the other hand, rely on trust. Network effects are neither of these. Network effects rely on interoperability and increasing usage base with each new user benefiting from the collective heritage of the older users who used the service.

How can this thinking be applied to the mobile ecosystem? Consider an application like a ‘mobile recommendation search engine’. A mobile recommendation search engine’ is a community based system that rates products and services which you could access from any mobile device.

This application could benefit from network effects i.e. as more people use the system, the more frequent and better the recommendations.

It would still be necessary for other factors to be favourable(for example costs being pre determined) but if conditions are favourable, such an application could gain a significant competitive advantage.

The impact of ignoring OpenGardens/network effects ..

Sadly, the industry is yet to appretiate the full potential of the OpenGardens / network effect. The old ‘walled gardens’ mentality proliferates. Content – is viewed as ‘broadcast content’ not ‘user created content’. This brings DRM and other restrictions to the user experience. The fundamental assumptions in this case are often wrong. As richer content types emerge – there is an attempt to ‘bolt on’ the old to the new. We see that with ‘mobile TV’. It’s debatable if customers want to see TV and movies on small handheld screens. Yet, the movie industry is already worried about the emergence of a new napster in this space!

This is old thinking – with very little added value. However, as the industry matures, we are optimistic that more OpenGardens thinking will become mainstream.